Weak Anti-mortgage Fraud System Rampant Among Banks, FSA Says

Jack Humphrey, Regulatory journalist
June 23, 2011 /

The Financial Services Authority (FSA) has raised serious concerns as it found that three out of four banks it sampled showed lax anti-mortgage fraud systems.

The firms failed to establish the legitimacy of the source of their customers’ wealth and the source of the funds to be used in transactions, the FSA claimed.

The mortgage fraud “thematic review” assesses the adequacy of lenders’ systems and controls to detect and prevent mortgage fraud.

The review was published at the height of FSA’s financial crime conference where its acting enforcement and financial crime director, Tracey McDermott, explained that the Financial Conduct Authority (FCA) will assume the FSA’s responsibilities on financial crime and will continue to focus on “the use of firms as a conduit for financial crime.”

McDermott vowed an “intensive and intrusive supervision of financial crime issues” by the FCA, adding that it will pursue the objectives of “keeping crooks out of finance, encouraging industry to strengthen its defences, and educating and warning consumers about the dangers they may face.”

Although lenders have improved, the review showed there are still weaknesses common to many firms. Consequently, the FSA vowed to ensure that lenders will have to implement remedial programs to strengthen their anti-fraud systems and controls.

The mortgage fraud review was published with two other papers by the FSA, including a consultation paper which aims to help firms reduce the risk of their business being used to facilitate financial crime, and another thematic review of how banks manage high risk customers including Politically Exposed Persons (PEPs), correspondent banking relationships and wire transfer payments.

PEPs are individuals with “prominent position in public life” that may make them vulnerable to corruption. They may include immediate family members and known close associates.

The financial crime guide provides guidance on anti-money laundering, terrorist financing, fraud, data security, bribery and corruption, sanctions, and weapons proliferation financing.

On the other hand, the anti-money laundering thematic review found that some banks seemed reluctant to dismiss “very profitable business relationships, including with PEPs, where there appeared to be an unacceptable risk of handling the proceeds of crime,” the FSA noted.

So far, the FSA has referred two banks to enforcement after it found “serious weaknesses in their systems and controls” for managing high risk customers including PEPs.

Some regulations relating to financial crime include the Money Laundering Regulations 2007, the Proceeds of Crime Act 2002 and the UK sanctions regime.

On July this year, the Bribery Act is slated to come into enforcement.

Firms are required “to conduct their business with integrity and with due skill, care and diligence; and to take reasonable care to organize and control their affairs responsibly and effectively with adequate risk management systems,” the FSA said, referring to its Principles.


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